In Part 1, we discussed the importance of including a management succession component in your farm’s succession plan. The second component that is often missing is the consideration of governance.
There are several reasons why governance is often dismissed. First, most business owners reject the idea that their operation is big enough to warrant a governance strategy. Second, they are not comfortable allowing other professionals to see financial information or other sensitive information. Third, they believe it will add complexity to running the operation. Finally, they believe they will be giving up control.
The reason a farm operation should consider a governance strategy is a powerful one. Most farms require the owners to leave money in the operation to facilitate a successful transfer to the next generation. Very few heirs in today’s economic environment have the ability to fund a complete buy out. Given this reality, owners are left facing the fact that their entire life’s work (and their retirement income) is now going to be in the hands of their heirs. This is one of the prevailing reasons so many farm operators find it difficult to determine when they should step out of the day-to-day operation and turn over management and decision making to the next generation.
Governance does require an owner to complete a mental shift. The decision is whether to stay in the operation and manage it OR to set up a system that will allow the owner to have access to information, input into key decisions and an ability to influence the selection of people who will have oversight of the operation.
The governance structure, in tandem with a management succession plan, is what often precipitates an owner’s ability to transition out of the day-to-day operational activities with a high level of confidence and ease. Knowing they will be able to see an issue long before it becomes an actual revenue impacting problem provides peace of mind.
A governance structure should do four things:
- Determine the ends. The “ends” define what the owners want from the business. This could be determining cash flow, profitability, growth or how much the owners will be paid from the business each year.
- Hire the CEO. In absence of the owner, a CEO or farm manager should be identified. This person would answer directly to the board and is accountable for meeting the ends.
- Establish the limitations of the CEO. A governance strategy should also identify the limitations of the CEO. This can include a guideline for expenditures, how much money he/she can borrow, what information needs to be shared regarding financial performance, etc.
- How the Board of Directors will govern itself. The governance policy should identify how members are elected, how often the board will meet, what happens if a board member wants to retire, etc.
So, let’s revisit our list of concerns. First, our operation isn’t big enough. If the successful transfer of the operation from one generation to the next requires that the owners leave money in the operation – you are big enough. The board doesn’t have to be big – three to seven members is all that is required to have a very effective board.
Next, you may be uncertain about sharing financial or other sensitive information with outsiders. The selection of your board can be from a very big geographical area. Many board meetings are held virtually in order to attract the RIGHT board members, and to limit exposure to people who may know you. There are board member recruitment sites which allow you to do a very comprehensive search, which will increase your ability to find professionals with the right experience and personality to truly support your operation.
Third, you may believe it will add too much complexity. Typically, at any phase of the succession process, the more clearly the roles, goals, expectations and accountability can be defined, the less complexity the operation will experience. Often I have found that the complexity occurs when there is disharmony, disagreement or lack of performance. Families are often not well equipped to deal with these issues and therefore the succession plan can stall or fall apart.
Finally, you may feel that you will lose control. Control in business is a phenomenon that can cause businesses to decline or fall apart. When an owner reaches a stage in his career where he is no longer able to perform as he has in the past, tensions between generations can become toxic. A comprehensive succession plan should define how an owner will transition into a position where he can provide value without slowing down the growth or production opportunities of the operation.
Governance strategies should be designed to create a high degree of communication and accountability that will allow a transitioning owner to feel confident that his investment in the farm is being carefully managed. In other words, give an owner more control, although it may look different than it has in the past.